ROUBINI: 'Make No Mistake: The Machines Are Coming'

The party was held at the American Museum of Natural History,
where Seth Meyers, the former Saturday Night
Live star, hosted the evening beneath a massive,
life-sized replica of a blue whale.

The party was packed with the usual collection of highly polished
New York media and business types. (The entertainment highlight
of the night for me was a charming duet by Lady Gaga and Tony
Bennett.)

It was a great honor to be asked
by Bloomberg and BusinessWeek to
give an official toast during the event, along with my fellow
toastmasters Henry Kissinger, Henry Kravis, and Melody Hobson.
For my toast, I was asked to select the innovation that I thought
created the most disruptive change during the last 85 years.

I decided to speak about the microchip—because the microchip may
well replace the human race.

Yes, I’m being intentionally provocative here: but it isn’t just
because of my nickname (“Dr. Doom”) that I’ve chosen to find the
dark shadow in the silver lining of technical progress.

A few weeks ago, Stephen Hawking, the greatest astrophysicist of
our time, gave a provocative speech of his own: Hawking suggested
that humans should start thinking about colonizing other planets,
because eventually artificial intelligence and robots will
replace the human race.

It may sound crazy now—but what seems crazy today may not sound
so crazy 25, 50, or 100 years from now.

This wave of technological innovation began in 1947 with the
invention of the transistor. A little over 10 years later, the
microchip appeared; and, soon after that, computers followed.
From these basic roots, the rate of innovation simply exploded.

We now live in a digital age where personal computers,
supercomputers, robotics, and artificial intelligence are
everyday features of our world.

All of these new labor-saving technologies are cheap to
deploy—and each will likely play a role in further automating and
digitizing our economy.

Without further ado, let’s take a look ahead to what many are
calling the Third Industrial Revolution.

Looking back as 2014 winds to a close, I see that a lot has
changed in the world economy this year. For example, there is a
new perception of the role of technology. Innovators and tech
CEOs both seem positively giddy with optimism. And while it is
true that some wondrous opportunities may lie ahead, there are
also dangers to be wary of as we look to the future.

Technologists claim that the world is on the cusp of a series of
major technical breakthroughs. The excitement in this sector
isn’t coming just from information technology. It’s also being
generated in the fields of biotechnology, energy technology,
nanotechnology, and especially from the manufacturing
technologies of robotics and automation.

These new manufacturing technologies have spawned a feverish
excitement for what some see as a coming revolution in industrial
production.

This “Third Industrial Revolution” will provide many investment
opportunities—such as green energy development and new kinds of
direct investment in those nations most likely to benefit—as well
as the potential for a steep rise in returns.

These are life-changing developments, and the consensus among
experts is that we will all witness their impact very soon.

The Coming Manufacturing Revolution

In the years ahead, technological improvements in robotics
and automation will boost productivity and efficiency, which will
translate into economic gains for manufacturers.

It will also benefit highly skilled workers—principally software
developers, engineers, and those who work in material science and
research. (If you’re a parent or a grandparent, you should
encourage the younger generations to explore any talents they
possess in these fields.)

Consumers and individuals should also benefit from lower retail
prices caused by lower production costs to manufacturers. In
short, things will be cheaper.

The quick growth of smart software over the past few decades has
been perhaps the most important force shaping the coming
manufacturing revolution. The extraordinary rise of the computer
software industry has led many of the world’s best minds to focus
on the challenges of developing better, smarter, more efficient
computer code.

As software development becomes more “glamorous,” the number of
bright youngsters studying software engineering increases,
creating a virtuous cycle for the software industry.

In addition to software services, a number of new technologies
driving the next manufacturing revolution are just now beginning
to be felt. They’re like foreshocks, early tremors of the coming
earthquake.

On the vanguard of this revolution we find 3D printing. Sometimes
3D printing is called “additive manufacture,” because the process
involves computer-controlled robots adding layers of materials to
create new things. (Traditional manufacturing usually removes
layers from raw material, for example the way a lathe cuts away
metal.)

3D printing and related technologies will open the door to
advances in manufacturing that have never before been possible:

Mechanical engineers will be able to prototype new products
more rapidly. New product designs can be created and tested in
days rather than months.

Manufacturing can be distributed globally to create the
greatest efficiencies in marketing and distribution.

Finally, customization of products for individual consumers
can occur at a price point that was never possible in the past.
Not only will things be cheaper, they’ll be your way, right away.

On the plus side of the equation, these changes promise a great
boom in productivity. Products will be created more cheaply than
ever before. Early adopters of new technology will reap a
windfall by perfecting the new techniques. Highly skilled jobs
will be created for those educated enough to participate in the
new tech-savvy manufacturing world. A few new high-tech
manufacturing billionaires may be added to the ranks of the
software barons of old.

However, for those workers not fortunate enough to participate in
the gains of the new economy, it may feel as though the whole
revolution is happening somewhere else. Entire economies risk
being destabilized in countries that rely on advanced
manufacturing and on service sector jobs. (If you’re reading
this, chances are you live in one.)

But remember the dark shadows of those silver linings: with each
new gain comes the potential loss of something else.

We know what we have to gain from this automated future. But
what, specifically, do we stand to lose?

A Rather Shaky Foundation

In my view, from the economic perspective, the technological
forces driving this revolution tend to have the following three
downside biases. That is, advances in technology tend to
be:

capital intensive (favors those who
already have money and other resources);

skills biased (favors those who already
have a high level of technical skill); and

labor saving (reduces the total number of
jobs in the economy).

The risk is that workers in high-skilled, blue-collar
manufacturing jobs will be displaced by machines before the dust
settles at the end of the Third Industrial Revolution. We may be
heading toward a future where factories consist of one highly
skilled engineer running hundreds of machines—with one worker
left sweeping the floor.

In fact, the person who sweeps the floor may soon lose that job
to a faster, better, cheaper, industrial strength Roomba Robot!

For the last 30 years, emerging-market economies have
increasingly displaced developed-market economies in the
manufacturing sector as a base of production. This is a story we
all know: the transition from the old industrial powers of
Western Europe and North America to the new ones in Asia. But
despite this shift, developed-market economies have somehow made
up for those losses in their labor markets.

Over the last 20 years, the overall unemployment rate in the
United States has hovered around 5% on average—except during
periods of economic recession, when it has spiked upward for
short periods of time.

In general, however, the loss of those manufacturing jobs has not
caused catastrophic levels of unemployment.

(Of course, this replacement of manufacturing jobs with service
jobs has not been equally distributed. Some regions have suffered
more than others. For example, the so-called Rust Belt in the
upper Midwestern section of the United States has experienced
more economic pain than most other regions. But while the local
suffering has been great in those regions hardest hit, the
overall trend throughout most developed-market economies is that
lost manufacturing jobs have been absorbed largely by new jobs
created in the service sector.)

In my view, however, there’s no guarantee that this positive
scenario—of service-sector jobs making up for lost manufacturing
sector jobs—will continue.

In fact, some of the trends mentioned earlier imply that the
Third Industrial Revolution will unleash forces that threaten the
relatively benign status quo. In addition to the job losses in
the manufacturing sector, these trends also threaten the very
service-sector jobs that have so far helped us avoid an
employment crisis.

To put the coming changes into context, think of what e-books
have already done: with a click, you can now download almost any
book for about $10 on your iPad or Amazon Kindle.

This is a great service and convenience for consumers. But most
of the jobs in the printing and distribution of books—and soon in
the newspaper and magazine industry—are already gone. (And so are
tons of jobs in the pulp paper industry—though that may come as a
relief to environmentalists).

Yet this is all just the tip of the iceberg. The powerful forces
unleashed by technology that will radically slash jobs in the
future are already upon us. Industries affected will range from
health care to retail, education, finance, transportation, real
estate, and even government.

One of the affected industries may even be your own.

It’s a Small Step from Offshoring to Automation

Think of the potential risks to service-sector jobs in the
context of what I call the “Automated Checkout Economy.” Several
decades ago, few people thought that low-paying jobs in the
retail sector would be outsourced or eliminated. Technological
progress may soon change their tune.

While grocery and checkout jobs cannot be entirely eliminated, at
least not quite, technology can assist in drastically reducing
the number of human beings needed to fill the remaining
positions. A trip into a drug store in New York City, my home for
the last several years, will often reveal a single pharmacy clerk
watching over four automated checkout terminals, where customers
scan and pay for their own purchases. I imagine that you’ve
probably seen something similar in your own town.

Other low-wage and labor intensive jobs in retail, such as
stocking the shelves of supermarkets with food, will soon be
replaced by machines that can do those jobs better and faster
than humans could.

This has already begun to happen in traditional brick-and-mortar
stores, while automation at online “e-tailers” has gone even
further. Giants like Amazon have already built massive
robot-staffed warehouses to distribute their orders. One day
soon, your friendly neighborhood UPS or FedEx driver delivering
those Amazon packages may even be replaced by a drone. And it may
be sooner than you think.

In retail, the slashing of middle management jobs has already
begun, as computers have become more efficient not just at
crunching numbers but at providing managers with the right
information at the right time.

Another trend that may result in a decrease in service-sector
jobs is something we might call “The Offshoring Pathway to
Automation.”

During the first phase of the transition to a truly globalized
labor market, New York Timescolumnist Thomas
Friedman and others popularized the narrative of high-skilled
jobs being outsourced from developed markets to emerging markets.
(Friedman’s book The World Is Flat is highly
recommended reading on this topic.)

While this trend continues, it supports potential for a still
greater transition.

Think, for example, about the process now in place for offshoring
medical services. A patient in New York or London may have his
MRI sent digitally to, say, Bangalore, where a highly skilled
radiologist reads the scan. However, that highly skilled
radiologist in Bangalore may only be paid a quarter of what a New
York radiologist would earn for reading tests.

It raises the question: how long before a computer can read those
images faster, better, and cheaper than that Bangalore
radiologist can?

Such a transition is not far off. The offshoring process has
already broken down reading an MRI into a series of simple steps
resulting in digital output. That digital output can then easily
be turned into an input in a fully automated process. This kind
of transition, from offshoring to automation, may become a factor
in reducing service-sector jobs in developed and emerging markets
in the near future.

Work in the Machine Age: Humans Need Not Apply?

The Third Industrial Revolution also coincides with other
systemic changes taking place in the economy. Entire industries
in the service sector will have to shrink massively for reasons
initially unrelated to advances in technology.

Let’s take two of the most obvious examples: the
financial-services sector and real estate.

In the years leading up to the economic collapse of 2008-‘09,
market bubbles fueled huge run-ups in the prices of financial
assets and real estate. With a bubble in asset prices came an
explosion in compensation, causing new workers to flood into
those sectors. As the last remnants of those bubbles deflate, job
cuts in those industries may become inevitable.

But over time, technology may allow even the jobs in real estate
and finance to be first outsourced and then totally eliminated.

Today, hundreds of thousands of back-office jobs in the financial
sector are outsourced to India and other emerging markets. But
tomorrow, a piece of computer code may be able to generate the
same sophisticated analytics that some of Wall Street’s highly
paid professionals now create.

Real estate—which is now highly labor intensive, with a plethora
of agents and brokers—is experiencing a revolution. 12 years ago,
in 2002, I was able to buy my first apartment in New York without
a real estate agent by using the online New York
Times listings. Today, even more sophisticated online
tools reduce the need even further for expensive middlemen.

A revolution is also underway in education, which is also
currently a very labor-intensive field.

With the growth of ever-more sophisticated online courses, will
we still need hundreds of thousands of teachers in the decades to
come? And what will all those former teachers do to earn a living
instead?

It becomes possible to imagine a future where the top 100
economists in the world, for example, can provide high-quality
and cheap online courses in their field. Those changes, however,
would mean displacing the jobs of hundreds of thousands of other
economics professors in the process.

Indeed, in places like emerging-market Africa, where building
brick-and-mortar schools is expensive and where training
high-quality teachers is difficult, online courses and cheap
tablet computers could gradually begin to replace traditional
education, making it even more affordable. Ironically, this would
lead to some unemployment, as the demand for highly educated
people to fill teaching positions declines.

Governments are shedding labor too, particularly governments
burdened by high deficits and debts.

The e-government trend can also lead to labor savings in the way
in which government services are provided to the public. You can
find tons of public services online and avoid spending hours
standing in line in an overcrowded office just to request a few
government forms.

Even transportation is being revolutionized by technology. Today
a friendly Uber driver or a car-sharing service like Zip Car can
replace the need to buy your own car or even rent one. But in a
matter of years, driverless cars—courtesy of Google and
others—may render the job of a driver or chauffeur obsolete.

So, whether it’s retail or finance, education, health care,
transportation, or even government, a massive technological
revolution will sharply reduce jobs over time. Low-skilled jobs
and medium-skilled white collar jobs will be the first to go, as
they have always been.

Industrial Revolutions—Past and Future

In order to better understand the future, it’s helpful to take a
look back at the past. During the First Industrial
Revolution, which began around the same time as American
independence from Great Britain, life began to shift away from
agriculture toward increasing industrialization. Farmers moved to
cities, and farms became industrialized.

Factories became widespread. A factory owner could take a farmer,
perhaps a farmer who could not read or write, and give him a job.
New methods—like the division of labor—and new machines allowed
that farmer to become more productive. In fact, farmers were able
to generate more “output” in a factory than on a farm.

But unlike modern automation, the machines needed to be run by a
new generation of workers: Men and women needed to “man” those
machines.

Productivity increased—and so did wages.

The Second Industrial Revolution, during
the end of the 19th century and the beginning
of the 20th, was an extension of the first. During
those years, there was an explosion in technology and methods of
communication. Thanks to the telegraph, the world became “wired”
for the first time.

The new advances in technology, however, cut both ways.

Take the case of Frederick Winslow Taylor, a major figure in the
Second Industrial Revolution. Taylor, known as the father of
scientific management, once wrote that the brawn required for
handling pig iron was proof in itself of the intellectual
unfitness of ironworkers to manage their own work. This is hardly
a democratic sentiment, and it was more or less the common one.

While new “scientific” methods of management increased the
productivity of workers, improvements in working conditions
lagged behind. (Taylor’s views didn't help matters.)

Perhaps the takeaway lesson is that it’s easier to improve
technical methods of production than workers’ opportunities.

But despite these challenges, the Second Industrial Revolution
created a higher demand for labor.

As we sit on the cusp of a Third Industrial
Revolution, a revolution that is both industrial and
digital in nature, it’s not certain that the demand for labor
will continue to grow as technology marches forward—unless the
proper policies to nurture job growth are put in place.

The world began to change during the first Digital
Revolution—during the rise of the Internet in the late ‘90s.
Then, the digital divide between those who knew how to use
computers and those who didn’t led to an income gap between
more-skilled workers and less-skilled workers.

At the extreme, as I mentioned in my introduction, some serious
thinkers are even worried about technology not only replacing
humans in jobs—but actually replacing humans entirely.

The implications of artificial intelligence, not just for jobs,
but human life, are now being pondered by some of the best minds
in technology.

There used to be a science fiction term for a state where human
beings were no longer able to control technology: It was called
“the Singularity.”

In the future, this Singularity may no longer be just science
fiction.

Will There Be a Green Revolution?

Of course, there are more optimistic sides of this story. Some of
those perspectives show a much rosier picture. The green
revolution in technology is a perfect example.

(Jeremy Rifkin is a believer in this view. In his 2011
book The Third Industrial Revolution, he makes a
case for his bullish outlook. Rifkin is optimistic about a great
many things: green renewable energy, urbanization of structural
power plants, hydrogen cells, and an Internet grid for power
transmission and distribution.)

These new technologies carry with them the promise of cleaner and
more efficient energy.

This objective, of course, could not be more crucial. The
search for green energy technology has become a global goal. The
evidence of environmental damage, caused by pollution and the
burning of fossil fuels, is now beyond question.

To cite just one sobering example of the size of the challenge, a
study by the World Health Organization (WHO) recently concluded
that one in eight deaths were caused by air pollution. This is
especially true in the developing world, where environmental
hazards tend to be significant.

As an example, air pollution in Beijing, where senior Chinese
government officials live and work, has reached dangerous levels.
The pollution in Beijing is now a practical threat to the Chinese
economy and to China’s plans for future development.

The Chinese government has begun to come down hard on its
domestic polluters by enhancing the power of the state to
regulate pollution. In light of the growing pressure to restrict
environmental pollution, it seems reasonable to expect that there
will be intensified research of green technologies. Hopefully,
this research will address the environmental challenges at their
root, rather than just fixing the damage of their effects.

Automation and Rising Inequality

While the odds for a green technology breakthrough during the
Third Industrial Revolution may be good, it seems very highly
likely that serious challenges will follow in the wake of further
developments in labor-reducing technologies.

As more and more workers are displaced, governments will need to
search urgently for new solutions to the problems of automation.

During the First Industrial Revolution, some of the worst forms
of winner-take-all capitalism festered in the newly
industrialized cities of Europe and the United States. The rate
of social and economic inequality increased rapidly. Despite the
political opposition to change, a series of economic shocks
ultimately convinced enlightened people in the US and Europe of
the necessity of the social-welfare state.

The benefits that workers take for granted in developed
markets—restrictions on child labor, pensions, retirement
benefits, unemployment benefits—were all created out of
necessity.

Enlightened social-welfare policies were ultimately vindicated,
not just morally but practically. In places where social reform
was not enacted, on the other hand, more destructive forms of
change took place. (The most extreme case of this destruction
was, obviously, the rise of Bolshevism in Russia.)

Now the concern is that technology, together with other factors,
is leading to a sharp rise in income and wealth inequality. There
is a further risk that inequality will also lead to social and
political instability.

The redistribution of wealth—from labor to capital and from wages
to profits—may even undermine growth. This makes perfect sense
when we consider that the concentration of wealth in the hands of
a few tends to reduce household consumption. In the United
States, household consumption makes up more than two-thirds of
our total GDP.

The rise in inequality was initially the result of trade and
globalization, such as jobs being offshored to emerging markets.
However, the technological innovation we’re witnessing now has
the potential to seriously worsen that inequality—especially when
those innovations are, as we discussed earlier, capital
intensive, skills biased, and labor saving.

The view is even more pessimistic when you factor in the
winner-take-all effects—also known as the so-called “superstar
phenomenon.”

Thanks to these winner-take-all effects, the top earners in any
field now get the lion’s share of the compensation. After making
a windfall profit, the “winners” are then able to use those
riches to influence politicians and write their own legislation,
which creates even more inequality.

In the 1930s, John Maynard Keynes had a more optimistic view of
the impact of technology: he argued that eventually we could all
work 15 hours a week and spend the rest of our time in
leisure—like creating art and writing poetry.

But in the Brave New World of labor-saving technology, it seems,
20% of the labor force will work 120 hours a week while the other
80% will have no jobs and no income.

So the ideal world of Keynes may turn out to become a nightmare.

Despite the rapid rate of change and the many uncertainties that
lie ahead, the past can help to serve as a model for the future.
Governments have a decided role to play in making that future
livable—as they once understood. In that spirit, we must search
for political and policy solutions to the coming challenges of
the Third Industrial Revolution and promote them where we can.

This is not, after all, the first time we’ve faced such problems.
At the end of the 19th and the beginning of the
20th centuries, world leaders stepped up to the
plate and came face to face with the horrors of
industrialization. Child labor was abolished throughout the
developed world, work hours were made humane, and a social safety
net was put in place to protect both vulnerable workers and the
larger (often fragile) economy.

The Past as Prologue

Former Treasury Secretary Larry Summers observed not long ago
that we don’t yet have an Otto von Bismarck or a Teddy Roosevelt
or a William Gladstone to mediate the current revolution now
underway in the technology sector. The Canadian writer and
politician Michael Ignatieff picked up on a similar theme in
a Financial Times op-ed called “We need a new
Bismarck to tame the machines.”

The references to these political giants of the
19th and 20th centuries are
revealing. Otto von Bismarck, the father of the unified German
state, is usually credited with the creation of the modern
social-welfare state in the 1880s. (He’s also credited with
militarizing Germany as he unified it—but let’s stick with his
good works for now.)

At about the same time as Bismarck in Germany, British Prime
Minister William Gladstone was reforming the most archaic aspects
of the British electoral system. Ultimately, Gladstone’s work led
to a great democratization and distribution of economic benefits
in what was then the world’s leading industrial nation.

Here in the United States, Theodore Roosevelt is perhaps best
remembered for breaking up the large industrial monopolies then
known as trusts. And we could also add Franklin Roosevelt to the
list who, in the tradition of his older cousin, sought to reform
the worst excesses of capitalism during the Great Depression.

As we begin the search for enlightened solutions to the
challenges that the Third Industrial Revolution presents, some of
the overall themes begin to emerge. The first and most important
characteristic is that the solution must channel the gains of
technology to a broader base of the population than it has done
so far.

To make that happen, the solution must have a major educational
component. In order to create broad-based prosperity, workers
need the skills to participate in the wealth that capitalism
generates. That is a major challenge in a world where technology
is changing the labor markets at a dizzying and increasing pace.

Workable solutions must address the world as it is, not as we
wish it to be.

The way ahead cannot be a naïve “Great Leap Forward”: it must
embrace the dynamics and creativity of free markets. On the other
hand, while the solutions we must pursue can leverage the ideas
of enlightened capitalists, those solutions must not rely solely
on the generosity of capitalists to succeed.

That most fragile balance—between the freedom of markets and the
prosperity of workers—must be sought and found.

Make no mistake: The machines are coming. The question for us is
what kind of welcome to prepare for them.